US inflation rose 3.4% in December, could delay rate cuts

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By Dan Sears

US inflation rose 3.4% in December, a larger-than-expected increase that could delay the prospect of three interest rate cuts the Federal Reserve plans for this year.

December’s Consumer Price Index — which tracks changes in the costs of everyday goods and services — came in above the 3.2% figure economists at FactSet expected, and marks an advance from the 3.1% growth reading in November — the lowest monthly reading since June.

The latest inflation figure — more than half of which was driven by persistently stiff housing costs — is significantly lower than the 6.5% advance in December 2022. Still, there’s a ways to go before inflation is tamped down to the Fed’s 2% target — a rate the US economy hasn’t seen in over a decade.

Fed Chair Jerome Powell has said that the 2% reading likely won’t happen until 2025.

“I don’t see us getting back to 2% this year or next year,” Powell said at the 2023 ECB forum. “I see us getting there the year after.” 

The Bureau of Labor Statistics attributed the increase to the shelter index, which rose 0.4% on a monthly basis and contributed to over half of the monthly all-items increase.

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Though the latest inflation figure is significantly lower from the 6.5% advance in December 2022, there’s still a ways to go before inflation is tamped down to the Fed’s 2% target, which threatens to keep interest rates high. Xinhua News Agency via Getty Images

The food index increased 0.2% in December, as it did in November.

And the gas index rose 0.4%, offsetting a decrease in the natural gas index, the federal agency said.

As of Thursday, the average price for a gallon of gas in the US is $3.08, according to AAA data.

Core CPI —  a number that excludes volatile food and energy prices — increased 0.3% in December after rising 0.2% in November.

The figure, a closely-watched gauge among policymakers for long-term trends, was also greater than what economists at FactSet expected.

Bank of America analysts said ahead of the CPI report’s release that a higher inflation figure could “keep the Fed in wait-and-see mode,” delaying rate cuts to later in the year.

Wall Street analysts have said that the Fed could slash interest rates as early as March, though that may be wishful thinking if inflation remains stubbornly above the central bank’s target.

In minutes of the Federal Open Market Committee’s December meeting released earlier this month, officials indicated that interest rates were “at or near” their peak when they voted to leave the benchmark federal funds rate between 5.25% and 5.5% last month.

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Fed Chair Jerome Powell has said that central bankers anticipate as many as three rate cuts in 2024, with Wall Street analysts suspecting that borrowing costs could be slashed as early as March. Xinhua/Shutterstock

“Almost all participants indicated that … a lower target range for the federal funds rate would be appropriate by the end of 2024,” said the minutes, with “a number of participants” highlighting increased uncertainty about how long strict monetary policy would need to be maintained given the progress achieved on lowering inflation.

The next FOMC meeting will be held Jan. 30 to 31, at which point central bankers will decide on whether to keep the borrowing rate at its current rate — the highest Americans have seen since 2006.

One data point that could affect the Fed’s decision is the job market’s ongoing resilience.

Recently-released data from the Bureau of Labor Statistics showed that a hotter-than-expected 216,000 jobs were added to the US economy last month.

The payroll growth came in over November’s higher-than-expected 199,000 advance — and well ahead of the 170,000 economists expected, according to Refinitiv data.

“It reinforces the notion that the Fed’s not going to be in a rush to cut rates.” former New York Fed President William Dudley told Bloomberg on Friday.

In an effort to slow the economy and tamp down inflation, the Federal Reserve has pushed interest rates to a 22-year high, between 5.25% and 5.5%. REUTERS

Dudley added that “the economy’s doing pretty well” and that “May is more likely” for the Fed to start cutting.

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“They’ll need to see some signs that the economy is slowing,” Dudley said. “The wage trend for now is something that is likely concerning to policymakers.”

The latest jobs report also noted that the unemployment rate stayed the same.

And average hourly earnings — a key measure of inflation — increased 15 cents, or 0.4% for the month, to $34.27. Over the past 12 months, hourly earnings are up 4.1%.

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